Fiscal Consolidation or Expansion: Interim Budget Choice
The Interim budget that will come on 1st February, 2024 is the budget before the General Elections. Will the government opt for the path of fiscal consolidation and conservatism in this budget? Its fiscal deficit target for FY 24 is 5.9% of GDP. Will it opt for a lower fiscal deficit target in Interim Budget?
Budgets just before elections tend to be populist
Budgets just before general elections can be populist in nature. Governments tend to resort to expansionary fiscal policy in these budgets. They hand out sops to appease the voters. Income tax reliefs are announced.
The probability looks less that the incumbent government will opt for a path to fiscal consolidation in the Interim budget. It may go for more expansionary fiscal policy to woo voters further. One thing that can be said with some degree of certainty is that it is highly unlikely that it will set fiscal deficit target of more than 5.9% of GDP for FY 25. It may opt for a target that is slightly less than this number.
RBI’s contractionary monetary policy has put downward pressure on GDP growth
The contractionary monetary policy that has been pursued by RBI in the past two years has put downward pressure on GDP growth. Ratings agency ICRA has said that India’s GDP growth in the December quarter will be less than 6%. Higher interest rates have adversely impacted interest sensitive consumption & spending. Demand for affordable and middle -income housing has gone down. Unemployment rate in December stood at 8.7%, according to data from CMIE. Higher inflation rate has reduced the real incomes of people.
Given the above factors, it is unlikely that the government would resort to some path of sharp fiscal consolidation in the Interim Budget. Sops such as relief in income tax for the middle class voters through one time income tax rebates may be announced. This will be done to enhance the feel-good factor, just before the elections. At the same time the government may hesitate in announcing any cuts to expenditures as a percentage of GDP in areas such as infrastructure, education or health.
What the markets want?
Stock markets will be happy if the government in the Interim Budget maintains a balance between fiscal prudence and fiscal stimulus. Fiscal deficit target at the same level as the year before or lower than it will keep markets satisfied. On the other hand, any measure to offset the tax reliefs given to the middle class by increasing tax burden on companies will upset the markets.